China, Japan Good Spots For Overseas Investing

Data from one major Wall Street investment firm says Japan and China, led by strong consumer sentiment, are better investment landing spots than the U.S. and Europe right now.

The notion that Asia could be a haven for nervous portfolio investors isn’t exactly new. Both economies have a history of growth when there is angst in U.S. and Euro markets.

“Asia continues to grow, but not without growing pains,” said Jason Pride, director of investment strategy at Glenmede Trust Company in Philadelphia, with $34 billion in assets. “Investors should favor investments in Japan and the Asian consumer, but they should also expect growing pains.”

U.S. equity markets are finding limits to their gains, Pride added, and overvaluation may “impair” returns, making international equities appear more attractive.

“In addition, U.S. public policy appears to be gradually shifting toward being more of a headwind,” Pride said.

That could mean a shift to Pacific Rim stocks and funds, especially in China and Japan. Case in point - the benchmark iShares China Large-Cap ETF is up 23 percent so far in 2017, and has risen steadily in the past two months.

Likewise, Japan’s iShares MSCI Japan ETF has racked up 12 percent in gains through late August. Comparatively, the SPDR S&P 500 is up 11 percent for the year, and performance has flattened out in the past 30 days.

More 'Fairly Valued'

While P/E ratios in the U.S. are in the top quartile, Europe appears more “fairly valued” and Japan remains the only major developed market at a discount to fair value, Pride said.

“Interestingly, while the strength in U.S. earnings (plus 6 percent year-to-date) have supported the U.S. gains, international markets have seen even greater strength, with European estimates rising over 7 percent, and Japanese estimates over 11 percent year-to-date.”

Pride offers several reasons why the Pacific Rim is a strong option for nervous U.S. investors:

• Chinese nominal retail sales, real industrial production and fixed asset investment came in softer near term as a result of increased monetary tightening after a strong June. Tightening credit is an attempt by Peoples Bank of China’s “prudent” leadership to deleverage.
• The IMF revised its forecast for China’s GDP growth upward from 6 to 6.4 percent, but noted that Chinese growth faces risk of potential U.S. protectionist trade policy and tighter credit.
• In Q2 2017, Japanese GDP grew 4 percent, the highest rate since Q1 2016, beating market expectations of 2.5 percent. Japanese GDP has continued its upward trajectory since 2012, when Prime Minister Shinzo Abe was elected. Corporate reforms and Abenomics appear to be having the desired effect.
• India’s tax reform a shock to the system. Indian Manufacturing and Services Purchasing Manager Indices (PMIs) dipped as a result of confusion and near-term shift effects from the sudden implementation of the goods and services tax (GST) reform. The negative impact is expected to be near-term in nature since the reform simplifies to one singular tax a previously complex tangle of state and federal taxes.
• Tensions ease, but North Korea remains a wild card. North Korea backed off their threat to attack Guam. The effect of US-South Korea joint military exercises remains to be seen.

More Investment Opportunities

Pride is joined by other investment professionals who see opportunity in the Far East right now.

“Asia remains a haven for overseas investors,” said Edward Anderson, head of UK Sales at FxPro in London. “This is especially true for Japan, given its record debt levels, with the value of foreign assets held by Japanese investors being substantially higher than the value of Japanese assets owned by foreign investors.”

Data from the Japanese Finance Ministry show that these net foreign assets stood at a remarkable 349 trillion yen ($3.12 trillion) at the end of 2016, Anderson noted.

“Japan remains, therefore, the largest creditor nation and a leader in terms of low-interest rates,” he said.

Japan kept interest rates at extremely low levels for two decades in its attempts to stave off deflation and spur economic growth. That has resulted in a sound economy to invest money, Anderson explained.

China, on the other hand, has managed to attain a sustained growth.

“Earlier in 2017, the IMF increased China’s growth forecast from 6.2 percent to 6.7 percent, albeit stressing that this came as a result of the authorities in Beijing putting a higher priority on hitting a growth target than on the quality of the economic output,” Anderson said.

The IMF’s international experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown.

“The risks posed by the possibility of the Chinese growth bubble bursting should be taken into account,” Anderson warned.

Global Thinking is Good

Thinking international on portfolio planning shouldn’t be a fad in the first place, others note – it should be part and parcel in any solid long-term investment plan.

“Japan just had a tremendous second-quarter GDP report at 4 percent on an annualized basis,” said Douglas Cote, chief market strategist at Voya Investment Management in Hartford, Conn. “China, in almost any scenario, is a consumer juggernaut so both bourses, in a globally diversified portfolio, are great places to be.”

Political considerations may be driving some American investors to look for non-domestic investing options.

“Investors tend to be nervous for the wrong reasons,” Cote added. “Politics is a poor reason to be nervous and we advocate following the fundamentals, which drive markets and avoid the noise.

“Currently, the fundamentals, especially bottom-line corporate earnings, are increasing broad based across the globe.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]